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Mr. Flight: On the other side of the coin, does the hon. Gentleman believe that growing job subsidies and the resulting payment of a wage that bears no relation to the skills and the market value for the job are an important disincentive to upping skills and productivity improvement?
Jon Cruddas: Does the hon. Gentleman mean through the tax credit regime?
Jon Cruddas: I would say that that is a correct and focused strategy to reactivate the supply of labour which has been proving effective in terms of the pattern of unemployment reduction and job generation over the past four or five years, of which the tax credit regime is a part. I agree that there could be disincentives to increased productivity where job subsidies disincentivise capital investment. That is orthodox economic theory. However, I emphasise the other pillar of the Government's economic strategy—namely, the move towards full employment and towards reactivating the stock of labour through an active labour market policy which carries with it the non- accelerated inflation rate of higher unemployment. There is a trade-off between inflation and unemployment. Such a policy would be deemed successful under its own terms of reference.
The search for greater economic regional balance and regeneration is central to sustaining productive growth. As Member of Parliament for Dagenham, I represent an area central to the industrial regeneration of east London and the broader Thames gateway. The emphasis on skills formation will be critical in our strategy of rebuilding the centre of manufacturing for London in Dagenham—the lowest wage economy in greater London, with low basic skills provision and staying-on rates.
The new centre for manufacturing excellence that is being built and the new Ford engine plant on the Dagenham estate will be key elements in this strategy. That is working hand in hand with the London development agency and the education and skills providers in the locality across the public and private sector. Already we are beginning to see results.
This sub-regional strategy complements the strategy developed in the Budget. The objective is to build a virtuous cycle of high-wage, high-skilled production alongside much-needed infrastructure development. That is beginning to happen in Dagenham, in collaboration with the devolved agencies and the Government. At the same time, the strategy is to retain macro-economic stability, rebuild our public services and confront poverty.
Overall, I welcome the fact that issues around productivity are moving centre stage in our economic debates. I congratulate the Government on the coherence of their strategy, and strongly support the Bill.
8.52 pm
Mr. Mark Hoban (Fareham): I begin by building on the comments of the hon. Member for Angus (Mr. Weir), who is not in his place. He raised a very important point for a large number of small business people—the treatment of unincorporated businesses and the impact that this Budget and preceding Budgets introduced by the Government have had on the balance between incorporation or remaining an unincorporated small business.
An article in Taxation magazine in March 2002 highlighted through the use of numbers the dilemma that many businesses face. I am not one for wading through huge volumes of numbers—I am rebelling against my previous occupation as a chartered accountant by not doing so—but I want to put on record the impact, prior to the Budget, of changes in the tax rates.
In the tax year 1996–97, comparing the tax on a net income of a taxpayer earning £42,000 as an unincorporated sole trader and the tax paid by an incorporated business, the benefits of being an incorporated business were relatively marginal, at about £1,300. By the financial year 2000–01, that benefit had increased to £3,500, showing that the unincorporated businesses were suffering as a consequence. Whereas in the last financial year, a trading income of £20,000 would yield a difference of about £2,000 in favour of an incorporated business, as a consequence of the Budget, with the extension of the starting rate for corporation tax of zero to £10,000, an incorporated business is some £3,300 better off than one that is unincorporated.
As a result, many small unincorporated businesses, such as plumbers, small builders or shopkeepers, think that they should incorporate because the tax position has become so advantageous for them. In doing so, however, they will of course incur additional costs, such as setting up the company, filing returns and the preparation of accounts which, although not audited, need to be filed with Companies House. That is a major concern. At a time when businesses are suffering from an increase in regulation, there seems to be a general drift towards incorporation in Government policy.
Previously, one of the barriers to incorporation for sole traders was the amount of pension contributions that they could make, because tax-free pension contributions were limited to salary. That pushed people to remain unincorporated: they paid themselves high salaries and received tax benefit on their pension contributions. However, with the introduction of stakeholder pensions by the Government, an incorporated sole trader need only pay himself a decent salary in one year and then for the remaining four years he can use that year-one salary as a reference point for his pension contributions. There is no longer a barrier to incorporation owing to differential treatment of pension contributions.
The Federation of Small Businesses asked whether that was a deliberate policy of the Government. The Inland Revenue assured the federation that the policy was deliberate and was intended to encourage enterprise. However, I am at a loss to understand how incorporation in itself is an encouragement to enterprise. I should have thought that we should be encouraging small businesses to be set up according to whichever format suited them rather than directing them—as the goal of Government policy—towards incorporation.
That affects not only sole traders, but partnerships. Today, I spoke to someone who runs his business as a partnership but is taking the route of incorporating it, as it is more tax-efficient to do so as a consequence of the tax changes made by the Government.
The situation will worsen in the financial year 2003–04. Personal allowances may be frozen, but the thresholds for corporation tax may rise in line with inflation and national insurance contributions will be higher. That will be an impetus to force more and more small businesses down the route of incorporation.
Small business men throughout the country would welcome an explanation from the Government as to why their conscious policy is to head down the route of forcing—or encouraging—small businesses to be incorporated. Perhaps the Paymaster General will take the opportunity of this debate to provide that explanation. It certainly has not yet reached small business men; they are angry about that drive to incorporation and feel that, as a consequence of this and previous Budgets, the Government are not interested in enterprise or indeed fairness as regards their businesses.
Several Opposition Members have drawn attention to the length of the Finance Bill; it is the third longest in history. The measure is complex. All the commentators on it are consistent in their remarks. On 25 April, Edward Troup of Simmonds and Simmonds said:
- "Companies which in the past have not had to worry about any special rules are now getting rules that they do have to worry about."
- "We really need a slowdown in this torrent of legislation to provide businesses with the opportunity to assess where they are and concentrate on their business."
Dawn Primarolo: Does the hon. Gentleman believe that the tax system should try to keep up with the massive and rapid changes that are occurring in business to ensure that those decisions that businesses take are on the basis not of distortions in the tax system but on the basis of what is best for their business? Therefore, if business changes, the tax system—if it is to provide the best environment for business—must also change.
Mr. Hoban: The Paymaster General makes a valid point. There is a distinction, however, between those changes that are driven by the way in which businesses change—to which the tax system must therefore respond—and the changes that the Government have introduced over the last five years in the tax credits scheme. As I said in Committee earlier this year, a series of different tax credit schemes exist. Those are changes in the tax system that the Government have imposed, with which employers and their advisers need to keep up. Keeping up with legislation is therefore a problem. I accept the Paymaster General's comment that there is a need for tax legislation to reflect change in business, but the Government must also recognise their responsibility for change in the tax system.
Clive Lewis, the secretary of the Institute of Chartered Accountants enterprise group, has summarised the problem with the burden of red tape and tax administration:
- "Not only does the volume and complexity of regulation eat into the resources of business but it absorbs time that could be spent more valuably on survival and expansion."
In his opening remarks, the Chief Secretary referred to the community investment tax credit, which will cost the Exchequer £5 million in the next fiscal year. The Bill includes 27 pages of regulation to administer a scheme that the Government estimate will raise only £100 million in investment in deprived areas. I am not clear what behavioural impact this tax change will have. I expect that a lot of money that would have already gone into deprived areas will simply be rebadged under the scheme so that people benefit from the generous tax credits over the life of the scheme. I question whether we need 27 pages of regulation to administer what appears to be a relatively small and inexpensive relief on offer to businesses that would invest in deprived areas.
The other area that causes me concern in the Budget is the tax relief for community amateur social clubs and sports clubs. The Government have been relatively generous in allowing merely six pages of regulation to cover that. When I look at the detail of those pages, however, it concerns me that many treasurers, who are not accounting or tax experts, may find categorisation of expenditure and the way in which non-qualifying expenditure can be clawed back from relief in previous years to be not worth the candle and too complicated to try to find ways of recovering some of the tax benefits offered by the Government. If we are to offer community groups the opportunity for tax relief, we should try to make sure that the schemes that we offer them are relatively simple and straightforward. By offering complex schemes, the take-up rate, as is seen so often with changes introduced by the Government, will be surprisingly low.
In a debate in Westminster Hall earlier this year, I commented on the way in which reliefs and changes to the tax system give rise to the risk of tax avoidance. I want to conclude by quoting from the Treasury Committee's report on the Budget. It referred to the film tax relief, which will be abolished in the Bill—
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